When the Greenback Goes Up In Smoke – by Vasko Kohlmayer

dollar-burn

“The world is changing, and the dollar is losing its status,” said Fabrizio Fiorini in an interview with Bloomberg this week. As one of those in charge of the $12 billion Aletti Gestielle SGR in Milan, Fiorini cannot be dismissed as some anti-American crank.

But Fiorini is only one of a legion of financial experts lamenting the dollar’s bleak prospects. So obvious and profound is the dollar’s predicament that CNBC’s Lawrence Kudlow recently felt compelled to pen a piece plaintively titled “Save the Greenback, Mr. President.” On Tuesday Reuters ran an article by James Saft headlined “Dollar Faces a Long Journey Downward.”

The roots of the dollar’s trouble are not difficult to trace. The main culprit is the breathtaking fiscal irresponsibility in Washington, D.C. With deficit spending completely out of control our government has been contracting obligations it cannot meet and the world is catching up with the fact. The fear is that the American government will do what governments almost always do when they find themselves facing an insurmountable debt: They inflate their currency to lighten the burden. This is, of course, a dishonest way to dispose of one’s obligations, because investors are paid back with debased money.

Faced with the prospect of holding increasingly worthless dollars, players around the world are looking for ways to unload the greenback. They have every reason to do so. In the last ten years the dollar has lost one third of its value. The spend-crazy policies of the Obama administration have had an especially aggravating effect. In the last six months alone the dollar is down by more than 10 percent. Bloomberg explains why:

“President Barack Obama’s effort to lead the world economic recovery by spending the U.S. out of its recession is undermining the dollar.”

The move away from the dollar is particularly significant when it comes to foreign central banks which have traditionally held American dollars as their currency reserve. The make up of their reserve balances, however, has been changing in recent months. Steven Englander, who used to work for the Federal Reserve and now is the chief U.S. currency strategist at Barclays in New York, had this to say:

“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it. It looks like they are really backing away from the dollar.”

Echoing Englander’s point, Bloomberg observed:

“Central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two quarter rout in almost two decades.”

The New York Post has reported that in the last three months central banks have placed 67 percent of their new cash into euros and yen. This makes for a shocking reversal, since – given the dollar’s status as the world’s reserve currency – the dollar would normally comprise two thirds of central banks’ currency holdings. At the present moment just above 60 percent of reserves are in dollars. This represents a truly dramatic drop from past levels.

But the central banks are not the only ones backing away. Institutional and individual investors are likewise decreasing their greenback exposure. In June of this year Bill Gross, the manager of the Pimco Total Return Fund – the world’s largest bond fund – advised dollar investors to diversify. He predicted that central banks would do the same before the year is out. Why did Gross think they would do this? Because of the deepening US budget deficit. It turns out Gross’ advice was both sound and prescient. Recently the Congressional Budget Office reported a record $1.4 trillion deficit for the fiscal year that just ended and central banks are indeed moving away from the dollar.

The dollar’s decline means that we are in the midst of a seismic shift. The whole edifice of the global monetary system – which has since World War II been backed by the dollar – is coming apart before our very eyes. It goes without saying that this will have far-reaching consequences, most of which will be decidedly unpleasant. For this we can thank the recklessness of our political class. Greedy to spend more than we could afford, they have pilfered our national wealth and devastated our finances. Sadly, this may not be the worst of it. In the past America used to be a rock of fiscal stability in a shifty and uncertain world. The word of the US government – its faith and credit – was almost as good as gold. This is not the case anymore. Stephen Roach, chairman of Morgan Stanley Asia, articulated this humiliating truth recently. Speaking about how Asian investors view the promises of the Obama administration to bring America’s fiscal house in order, Roach said:

“The most important thing coming from investors in Asia, where I am, is despite all these lofty assurances by U.S. officials that there’s a credible exit strategy from both fiscal and monetary stimulus, they understandably don’t believe it.”

As the dollar’s decline shows all too clearly, Stephen Roach is correct. The world is quickly losing faith in America’s ability to do what’s right. This is surely not the kind change we were hoping for.

  • Proxywar

    I don't have any proof to back up this hypothesis I'm about to give, but it seems fairly obvious to me via trends and intuition that this is the kind of change Obama was talking about all along. For example, If you take obama's past history into account accompanied by what Obama said to SEIU and then project it onto the geopolitical map it would seem to me that his intentions for the poor are good, but paving the way will lead to hell. Espeically for Americans. While the third world reaps the benefits. Could this be his agenda? Sink America so other nations are given a chance to succeed? Could this liberal theory which was created so long ago and is still revered today be what Obama has always believed would bring real change?

  • MizPris

    Proxy, I agree with your conclusion. I also believe that this is a long thought out plan. To lower our standing in the world and to lower our standard of living. As Pelosi, the idiot, has said, to create a “level playing field”. Not just in the US, but the world. To my mind, it won't improve the quality or standard of living in the third world, but it will IMO, destroy ours.

    Voila! Ultimately, equality in poverty in the eyes of the Obama's and Pelosi's is preferable to some having more than others. No matter we created our country with blood, sweat, tears, and freedom, while others in the world were satisfied with mediocrity. The left thinks this is a zero sum game and we must conform to a mediocre existence. The “playing field” is the world, therefore “A New World Order”.

    I have come to the conclusion that none of what has happened was accidental or incidental, but purposeful, including our economic crisis. Once we accept that, it explains why the administration and congress continue to print worthless paper called money, and continue to spend like madmen. They don't care about the repercussions for Americans, or our healthcare, or the hoax called global warming. It's all about bringing us into line with the leftist plans by hook or by crook, creating crises as an excuse to do it.

    And finally, it's about power for the elities and international power brokers who are true believers in this insanity. They don't plan to suffer I'm sure, but we will. I have never been a conspiracy theorist, but to pretend there cannot be a conspiracy or grand plan is to avoid reality. It all makes sense, and explains why things are so crazy and inexplicable to common sense folks.

    I think we have a fight on our hands we never bargained for, nor wanted, but I feel it in my bones. Having said all that, I pray I'm wrong, but I don't think so.

  • keithrage

    “Never let a disaster go to waste”…. thanks Ron.E. you could have continued with….”and if you haven't got one, make one”.
    MizP. If you feel it in your bones, you know its real.

  • davarino

    Out of this crisis I believe we have an opportunity to turn this thing around. Finally they are laying their cards on the table for all to see instead of nickle and diming us to death. I believe there are enough patriots in America that in the past have not been paying atention but will be awakened. Once a large majority of people wake up there will be no stopping the momentum. At that point it wont matter how sneaky or underhanded the tirents are, the people will send them scattering like cockroaches. They can only go so far without the peoples consent, then we send them back to the stone age.

  • Nessus

    It's too late. Almost all Dems and most Repubs are guilty of killing our country. Especially under Hussein Obama's guidance, we will be lowered and “leveled” to that of Belgium and Indonesia, Thailand and Kenya.

    That is Obama's goal – leveling. That what Obamacare is, lowering the healthcare of 85% of Americans to give to the 15% without insurance even though the 15% is made up of people who don't have insurance for many, varied reasons.

    We are weakening ourselves economically and militarily. Obama's vision is coming true.

  • brimp

    This is actually a good thing. The United States will continue to spend money as long as people are willing to loan it to them. The socialism will end when the whole house of cards tumbles. It won't be pleasant but, the cards are falling now. The restoration of constitutional money, gold and silver, is a good thing. Allowing the criminals who perpetrated this disaster to have more power will only cause the crash to be more complete. Abolish the Federal Reserve.

  • Proxywar

    The New World Order line is vague and cliche, I also don't agree with the notion that our paper money is worthless just becuase it's not back by gold or sliver standard. I'm not going to go into any greater detail about the former or latter. However, I will say this I agree with your main thesis. Trust me, I'm looking every day for the smoking gun evidence where Obama has slipped up and spoken on these intentions. If I find this evidence our conclusion will be valid one and not just wishful thinking. There is a great “what if” post on american thinker about Obama you read.

    http://www.americanthinker.com/2009/10/if_obama

  • kimber12

    If we go down, they all go down the toilet.

    We haven't been the source of other country's lack of prosperity. However, we have been an enabler of socialism for much of the globe.

  • MizPris

    Thanks Proxy, I do go to American Thinker from time to time. I'll check out the article you mention. I didn't say it's because it's not backed by gold or silver, I mean we are spending money we don't have, and borrowing from China, money we can't pay back. Under these circumstances, printing it doesn't raise it's value, it devalues it.

    The New World Order may be cliche, but it doesn't matter what you call it. The more power we sign over to the World Bank, IMF, or world court, and international agreements which dilute our sovereignty, the closer we are to becoming bonded to a central world power.

    God knows this is not wishful thinking on my part, anything but. It is not anything I would want to be correct about either. I just see it as inevitable based on what has already been done, and what is being planned that we know about. I can only imagine what we don't know about, and I have a feeling none of it is good.

  • bubba4

    Wow…you got through an article talking about the decline of the dollar without mentioning Bush….that's impressive.

    It only takes you a couple of paragraphs to turn it into :The spend-crazy policies of the Obama administration have had an especially aggravating effect”

    Yeah sure…it's Obama's fault…Bush and the GOP's years in complete control of government are wiped away and now referred to as merely “government”. You guys are simply pathetic…transparent…hacks.

  • MizPris

    Bubba, I guess you were hiding under a rock when we conservatives worked like hell to stop immigration reform, or when we complained about too much spending, and the nomination of Harriet Myers for the Supreme Court. All under President Bush. He left office with a 450 billion deficit.

    To be fair, his administration also made several attempts to rein in Fannie Mae and Freddie Mac, to no avail.

    However that was then and this is now. We listened to you name call and whine for eight years, so please spare us your complaints. We have genuine concerns now as we did then. Only now, this administration is engaged in an all out power grab the likes of which we've never seen. Either you are happy with that, or, you are so in the tank for Obama, that you can't see it.

    Now 450 billion is made to seem like chump change in comparison to trillions more in debt. Their plans for entitlements, and control through the phony “green” agenda is clear to anyone who wishes to see. All a huge grab for power. The attempt to silence any critics big and small lends itself to the description of a thugocracy more in line with a dictatorship of a third world country, not America.

    I think you might try being more concerned for your country, than defending policies which will surely harm this nation for generations if left to those of the political persuasion now in the majority in Washington DC.

    These are not mainstream Democrats, they are far left radicals, and they have bought and own the Democrat Party. If you yourself are a far left radical my words are wasted. If not you might at least consider that the concerns I spell out here are real, and not mere hyperbole.

  • bubba4

    The National debt went up by 5 trillion under Bush….sorry. He did do a very good job of keeping the wars “off the books” so to speak, but that is just creative shuffling, the expenses of the wars and his “tax cut” were very real.

  • USMCSniper

    As usual thou art full of it!

    Obama has already helped quadruple the deficit with his stimulus package, pledging to halve it by 2013 is hardly ambitious. The Washington Post has a great graphic which helps put President Obama’s budget deficits in context of President Bush’s.

    What’s driving Obama’s unprecedented massive deficits? Spending. Riedl details:

    President Bush expanded the federal budget by a historic $700 billion through 2008. President Obama would add another $1 trillion.
    President Bush began a string of expensive finan­cial bailouts. President Obama is accelerating that course.
    President Bush created a Medicare drug entitle­ment that will cost an estimated $800 billion in its first decade. President Obama has proposed a $634 billion down payment on a new govern­ment health care fund.
    President Bush increased federal education spending 58 percent faster than inflation. Presi­dent Obama would double it.
    President Bush became the first President to spend 3 percent of GDP on federal antipoverty programs. President Obama has already in­creased this spending by 20 percent.
    President Bush tilted the income tax burden more toward upper-income taxpayers. President Obama would continue that trend.

    President Bush presided over a $2.5 trillion increase in the public debt through 2008. Setting aside 2009 (for which Presidents Bush and Obama share responsibility for an additional $2.6 trillion in public debt), President Obama’s budget would add $4.9 trillion in public debt from the beginning of 2010 through 2016.

  • CowboyUp

    You should put the blame where it belongs yourself bubba, on the GOP congress pre jan '07, and the dp congress since then. They control the purse strings, the President can only propose, sign, or veto.

    Tell us what congress and hussein's doubling of the rate of increase of public debt, rate of increase of the money supply, and higher taxes will do to improve the economy or reduce the deficit, much less the national debt? If what President Bush, or more accurately, what the GOP congress did was wrong, how can what the dp congress and hussein are doing be right?

  • bubba4

    Big tax cut for the rich and the two wars was a bad idea.
    The fed rate being kept so low for so long to try to prevent the inevidable collapse was a bad idea. The repealing of depression era laws governing banking and insurance was a bad idea (this was by the Republican Congress just before Bush).

    Sure Cowboy…the President was just a figurehead…it was all Congress with the power. During Bush's reign, the Republican party and it's national media organs were as strong as they have ever been….everything Bush wanted…he got….if he didn't like a law, he just issued a signing statement.

    Completely repeal the Bush tax cuts to the rich….that would be a good idea.
    Get out of Iraq…that would be a good idea. Make the banks pay back the bailout money on a schedule…that would be a good idea. Use executive compensation as the benchmark for what they can afford to pay back.

    Right now I think the administration is playing it safe trying to see how the economy recovers. If it does, then they should give another tax cut to the middle class and independent workers….that would be a good idea. Then you phase out energy subsidies over the next four years….there is a lot of other stuff….

  • bubba4

    You just shuffle the numbers and use what you want. So it becomes a faith issue. Who cares what you believe. You cobble up anything that supports you pseudo-religious hard-on for anything against Obama.

    How much debt did we add under Bush? 5 trillion. Shuffle that dumbass.